Thursday, July 8, 2010

· China – the PBOC said Thurs that China’s economy was moving in the right direction but the bank still faces challenges in managing inflation expectations and maintaining fast and stable growth; PBOC said it would maintain its stance of “moderately lose” monetary policy. The PBOC also reiterated its long-standing statement about the yuan (DJ)

· China - will extend a tax on oil, gas and coal extraction to the entire nation that will help the government fund spending – Bloomberg

· China’s JGB purchases surge - According to the MoF data released today, China's net purchase of Japanese bonds surged to JPY735.2 bn in May from JPY197.8 bn in April. This is overwhelmingly the largest monthly net purchase since Jan 2005 when the data became available (see below chart). Note, the second largest net purchase was JPY211.6 bn recorded in January 2010. Most of the inflows into Japanese bonds, JPY694.8 bn, went into short-term debt. Basically, given the negative carry, China should not have any incentive to buy Japanese bonds aggressively. But from the perspective of reserve management, China's official still has incentive to buy Japanese bonds due to its ample liquidity. Given the huge size of China's reserve, only a few asset classes can absorb demands from China's reserve.